Lighthizer on Trade

U.S. Trade Representative Robert Lighthizer spoke at CSIS yesterday. The full transcript is here. I'm going to respond to some of his specific points.

Early on, he refers to a growing skepticism about trade:

For decades, support for what we call free trade has been eroding among the electorate. There has been a growing feeling that the system that has developed in recent years is not quite fair to American workers and manufacturing, and that we need to change.

Fifty-two percent of the 2,094 adults polled in the United States say they support expansion of free trade across borders. Within that group, 18 percent said they “strongly support” free trade, and 34 percent said they “somewhat support” it. Seventeen percent said they “somewhat oppose” free trade across borders, and 8 percent “strongly oppose” it.

I know there are some passionate opponents of trade, but most of the the polling I've seen suggests that a majority of Americans support it (the question in the poll above was "Do you generally support or oppose ... Expansion of free trade across borders"). You might not get applause at a campaign rally by praising NAFTA, but on the other hand harsh statements about trade agreements are not necessarily going to win you a majority of the vote.

He then talks about his preference for markets:

I believe, like many of you, that removing market distortions, encouraging fair competition, and letting markets determine economic outcomes leads to greater efficiency and a larger production of wealth both here and abroad. I’m sure that most here also agree that many markets are not free or fair. Governments try to determine outcomes through subsidies, closing markets, regulatory restrictions, and multiple similar strategies. The real policy difference, I submit, is not over whether we want efficient markets, but how do we get them.

What is the best thing to do in the face of market distortions to arrive at free and fair competition? I believe – and I think the president believes – that we must be proactive, the years of talking about these problems has not worked, and that we must use all instruments we have to make it expensive to engage in non-economic behavior, and to convince our trading partners to treat our workers, farmers, and ranchers fairly. We must demand reciprocity in home and in international markets. ...

All governments, including the United States, intervene heavily in markets, in a wide range of ways. Are some governments intervening more than others? Yes, although it is hard to come up with a precise ranking, and I suspect the United States is not in the lead when it comes to avoiding government distortions of the market. I support the idea of trying to convince other countries to reduce their market distortions, but we will probably have to remove some of our own in order to accomplish that.

Now on to trade deficits:

... the president believes – and I agree – that trade deficits matter. One can argue that too much emphasis can be put on specific bilateral deficits, but I think it is reasonable to ask, when faced with decades of large deficits globally and with most countries in the world, whether the rules of trade are causing part of the problem.

Now, I agree that tax rates, regulations, and other macroeconomic factors have a large part in forming these numbers, and the president is tackling these issues. But I submit the rules of trade also matter, and that they can determine outcomes.

In a simple example, how can one argue that it makes little difference when we have a 2 ½ percent tariff on automobiles and other developed countries have a 10 percent tariff, that it is inconsequential when these same countries border-adjust their taxes and we do not, or that it is unimportant when some countries continuously undervalue their currencies? Is it fair for us to pay higher tariff to export the same product than they pay to sell it here?

I don't get the sense that current U.S. government policy is tackling the macroeconomic factors that are at the heart of trade deficits. Without action there, the trade deficits will remain (not that it matters).

As for how the "rules of trade" can affect this, I made the point above that all governments intervene in markets, including through trade barriers. The World Tariff Profiles publication is helpful here. The United States has relatively low tariffs, although not the lowest and comparable to other developed countries (the U.S. simple average MFN applied rate is at 3.5%, Australia is at 2.5%, Canada is at 4.2%, the EU is at 5.1%, Japan is at 4.0%, and New Zealand is at 2.0%). Non-tariff protectionist measures are more difficult to measure and compare. But regardless, if we can use trade negotiations to bring down protectionist trade barriers at home and abroad, that is a good thing.

Then there is the issue of China:

I believe that there is one challenge on the current scene that is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.

Unfortunately, the World Trade Organization is not equipped to deal with this problem. The WTO and its predecessor, the General Agreement on Tariffs and Trade, were not designed to successfully manage mercantilism on this scale. We must find other ways to defend our companies, workers, farmers, and indeed our economic system. We must find new ways to ensure that a market-based economy prevails.

I'm not convinced we have really tried that hard to use WTO rules to target Chinese protectionism. We should file more cases, and pursue Article 21.5 complaints where we are unhappy with the compliance measures. I'm not sure why this hasn't happened.

Finally, there is a suggestion to reevaluate trade agreements after a certain period of time:

we are looking at all of our trade agreements to determine if they are working to our benefit. The basic notion in a free-trade agreement is that one grants preferential treatment to a trading partner in return for an approximately equal amount of preferential treatment in their market. The object is to increase efficiency and to create wealth. It is reasonable to ask after a period of time whether what we received and what we paid were roughly equivalent. One measure of that is change in trade deficits. Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.

Not that any country is going to agree to this, but presumably such a rule would have to apply in both directions. Does the U.S. government really want to open up trade agreements and grant additional concessions if, for many possible reasons, the bilateral trade balance moves in the direction of a surplus after signing a trade agreement?

Comments

U.S. Trade Representative Robert Lighthizer spoke at CSIS yesterday. The full transcript is here. I'm going to respond to some of his specific points.

Early on, he refers to a growing skepticism about trade:

For decades, support for what we call free trade has been eroding among the electorate. There has been a growing feeling that the system that has developed in recent years is not quite fair to American workers and manufacturing, and that we need to change.

Fifty-two percent of the 2,094 adults polled in the United States say they support expansion of free trade across borders. Within that group, 18 percent said they “strongly support” free trade, and 34 percent said they “somewhat support” it. Seventeen percent said they “somewhat oppose” free trade across borders, and 8 percent “strongly oppose” it.

I know there are some passionate opponents of trade, but most of the the polling I've seen suggests that a majority of Americans support it (the question in the poll above was "Do you generally support or oppose ... Expansion of free trade across borders"). You might not get applause at a campaign rally by praising NAFTA, but on the other hand harsh statements about trade agreements are not necessarily going to win you a majority of the vote.

He then talks about his preference for markets:

I believe, like many of you, that removing market distortions, encouraging fair competition, and letting markets determine economic outcomes leads to greater efficiency and a larger production of wealth both here and abroad. I’m sure that most here also agree that many markets are not free or fair. Governments try to determine outcomes through subsidies, closing markets, regulatory restrictions, and multiple similar strategies. The real policy difference, I submit, is not over whether we want efficient markets, but how do we get them.

What is the best thing to do in the face of market distortions to arrive at free and fair competition? I believe – and I think the president believes – that we must be proactive, the years of talking about these problems has not worked, and that we must use all instruments we have to make it expensive to engage in non-economic behavior, and to convince our trading partners to treat our workers, farmers, and ranchers fairly. We must demand reciprocity in home and in international markets. ...

All governments, including the United States, intervene heavily in markets, in a wide range of ways. Are some governments intervening more than others? Yes, although it is hard to come up with a precise ranking, and I suspect the United States is not in the lead when it comes to avoiding government distortions of the market. I support the idea of trying to convince other countries to reduce their market distortions, but we will probably have to remove some of our own in order to accomplish that.

Now on to trade deficits:

... the president believes – and I agree – that trade deficits matter. One can argue that too much emphasis can be put on specific bilateral deficits, but I think it is reasonable to ask, when faced with decades of large deficits globally and with most countries in the world, whether the rules of trade are causing part of the problem.

Now, I agree that tax rates, regulations, and other macroeconomic factors have a large part in forming these numbers, and the president is tackling these issues. But I submit the rules of trade also matter, and that they can determine outcomes.

In a simple example, how can one argue that it makes little difference when we have a 2 ½ percent tariff on automobiles and other developed countries have a 10 percent tariff, that it is inconsequential when these same countries border-adjust their taxes and we do not, or that it is unimportant when some countries continuously undervalue their currencies? Is it fair for us to pay higher tariff to export the same product than they pay to sell it here?

I don't get the sense that current U.S. government policy is tackling the macroeconomic factors that are at the heart of trade deficits. Without action there, the trade deficits will remain (not that it matters).

As for how the "rules of trade" can affect this, I made the point above that all governments intervene in markets, including through trade barriers. The World Tariff Profiles publication is helpful here. The United States has relatively low tariffs, although not the lowest and comparable to other developed countries (the U.S. simple average MFN applied rate is at 3.5%, Australia is at 2.5%, Canada is at 4.2%, the EU is at 5.1%, Japan is at 4.0%, and New Zealand is at 2.0%). Non-tariff protectionist measures are more difficult to measure and compare. But regardless, if we can use trade negotiations to bring down protectionist trade barriers at home and abroad, that is a good thing.

Then there is the issue of China:

I believe that there is one challenge on the current scene that is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.

Unfortunately, the World Trade Organization is not equipped to deal with this problem. The WTO and its predecessor, the General Agreement on Tariffs and Trade, were not designed to successfully manage mercantilism on this scale. We must find other ways to defend our companies, workers, farmers, and indeed our economic system. We must find new ways to ensure that a market-based economy prevails.

I'm not convinced we have really tried that hard to use WTO rules to target Chinese protectionism. We should file more cases, and pursue Article 21.5 complaints where we are unhappy with the compliance measures. I'm not sure why this hasn't happened.

Finally, there is a suggestion to reevaluate trade agreements after a certain period of time:

we are looking at all of our trade agreements to determine if they are working to our benefit. The basic notion in a free-trade agreement is that one grants preferential treatment to a trading partner in return for an approximately equal amount of preferential treatment in their market. The object is to increase efficiency and to create wealth. It is reasonable to ask after a period of time whether what we received and what we paid were roughly equivalent. One measure of that is change in trade deficits. Where there the numbers and other factors indicate a disequilibrium, one should renegotiate.

Not that any country is going to agree to this, but presumably such a rule would have to apply in both directions. Does the U.S. government really want to open up trade agreements and grant additional concessions if, for many possible reasons, the bilateral trade balance moves in the direction of a surplus after signing a trade agreement?